i Economics of an Innovation System Existing literature looks at national innovation systems from the perspective of either “inside the black box” or “outside the black box”. This is the first book that analyzes both the inside and outside of the black box using a general equilibrium framework. Thebooklooks atwhatisoutsidethe blackboxandprovides modelsofpath- dependentendogenousgrowth;examinesthedynamicsoftheblackboxfromthe intersectoralperspectiveoftheeconomy;andproposesaninnovationflowmatrix. Italso takes into accountboth businesscyclesandendogenousinnovation inthe unified New Keynesian dynamic stochastic general equilibrium (DSGE) model and examines how business cycles and other policy shocks affect endogenous innovation. Theunifiedtreatmentofthenationalinnovationsystemfromperspectivesboth inside and outside the black box using rigorous economic models and empirical analyses makes this an enlightening work, shedding new light on innovation economics. Tsutomu Harada is Professor of Industrial Economics at Kobe University, Japan. He received Ph.D. in economics from Stanford University and Ph.D. in business administration from Kobe University. His research interests include innovation economics, technology management, and strategy. Routledge Studies in the Economics of Innovation The Routledge Studies in the Economics of Innovation series is our home for comprehensive yet accessible texts on the current thinking in the field. These cutting-edge, upper-level scholarly studies and edited collections bring together robusttheoriesfromawiderangeofindividualdisciplinesandprovidein-depth studies of existing and emerging approaches to innovation, andthe implications of such for the global economy. Automation, Innovation and Economic Crisis Surviving the Fourth Industrial Revolution Jon-Arild Johannessen The Economic Philosophy of the Internet of Things James Juniper The Workplace of the Future The Fourth Industrial Revolution, the Precariat and the Death of Hierarchies Jon-Arild Johannessen Economics of an Innovation System Inside and Outside the Black Box Tsutomu Harada For more information about this series, please visit: www.routledge.com/ Routledge-Studies-in-the-Economics-of-Innovation/book-series/ECONINN iii Economics of an Innovation System Inside and Outside the Black Box Tsutomu Harada Firstpublished2019 byRoutledge 2ParkSquare,MiltonPark,Abingdon,OxonOX144RN andbyRoutledge 52VanderbiltAvenue,NewYork,NY10017 RoutledgeisanimprintoftheTaylor&FrancisGroup,aninformabusiness ©2019TsutomuHarada TherightofTsutomuHaradatobeidentifiedasauthorofthisworkhasbeen assertedbyhiminaccordancewithsections77and78oftheCopyright,Designs andPatentsAct1988. Allrightsreserved.Nopartofthisbookmaybereprintedorreproducedorutilised inanyformorbyanyelectronic,mechanical,orothermeans,nowknownor hereafterinvented,includingphotocopyingandrecording,orinanyinformation storageorretrievalsystem,withoutpermissioninwritingfromthepublishers. Trademarknotice:Productorcorporatenamesmaybetrademarksorregistered trademarks,andareusedonlyforidentificationandexplanationwithoutintentto infringe. BritishLibraryCataloguing-in-PublicationData AcataloguerecordforthisbookisavailablefromtheBritishLibrary LibraryofCongressCataloging-in-PublicationData Acatalogrecordforthisbookhasbeenrequested ISBN:978-1-138-38853-6(hbk) ISBN:978-0-429-42544-8(ebk) TypesetinTimesNewRoman byApexCoVantage,LLC v Contents List of figures vii List of tables viii Introduction 1 PART I Outside the black box: path-dependent growth 19 1 Path-dependent economic growth with technological trajectory 21 2 Path-dependent economic progress and regress 40 3 Division of labor in innovation between general purpose technology and special purpose technology 58 PART II Dynamics of the black box: intersectoral growth 81 4 Advantages of backwardness and forwardness with shifting comparative advantage 83 5 Changing productive relations, linkage effects and industrialization 100 6 Structural change and economic growth with relation-specific investment 118 PART III Inside the black box: innovation mechanism 139 7 Focusing device as innovation mechanism and cluster growth 141 vi Contents vi 8 Managing innovation probabilities through focusing device 156 9 Three-step flow of knowledge communication 171 PARTIV Measuring the black box: innovation flow matrix and policy evaluation 191 10 Model of intersectoral flow of technology using technology and innovation flow matrices 193 11 Estimating innovation flow matrix and innovation linkages in the East Asian region and the United States 209 12 Endogenous innovation and macroeconomic shocks in a New Keynesian DSGE model 236 References 259 Index 273 vii Figures 1.1 The growth paths 33 1.2 The growth paths and convergence clubs 34 5.1 Determination of backward and forward linkages 108 5.2 Effects of R&D shocks 110 5.3 Effects of capital share shocks and an increase of labor share 111 5.4 Effects of labor share shock 111 5.5 Effects of vertical specialization 113 6.1 Determination of forward linkages 127 8.1 Innovation trajectories 166 8.2 Three types of dynamic strategies 167 8.3 Shifts in competitive advantages and innovation trajectories 167 11.1 Production structure 212 12.1 Preference shock (eb) 248 t 12.2 Government expenditure shock (eg) 249 t 12.3 Investment adjustment cost shock (ei) 249 t 12.4 Investment-specific technology shock (ec) 250 t 12.5 Price markup shock (ep) 251 t 12.6 Wage shock (ew) 251 t 12.7 Monetary policy shock (er) 252 t 12.8 Productivity shock (es) 253 t 12.9 Endogenous innovation shock (ea) 254 t Tables 5.1 Correlation between backward and forward linkages 101 8.1 Capability management in two-tier technology systems 160 8.2 Management of technology systems 162 9.1 Descriptive statistics 182 9.2 Determinants of boundary spanning individuals (TOBIT) 184 9.3 Determinants of the frequency of internal communication 185 9.4 Percentageofboundaryspanningindividualswhocommunicate with transformers 186 10.1 Total, direct, and indirect effects 204 10.2 Indirect effects of key sectors 205 11.1 Innovation input–output matrix (G0) (excluding the USA) 222 11.2 Innovation input–output matrix (G0) (with the USA) 225 11.3a Innovation backward and forward linkages 227 11.3b Innovation backward and forward linkages 228 11.4 Z tests for pairwise differences in innovation forward linkages (without US) 230 11.5 Z tests for pairwise differences in innovation forward linkages (with US) 231 11.6 Average growth rate and volatility 232 12.1 Parameter estimation 246 12.2 Variance decompositions 247 1 Introduction 1 Inside and outside the black box One thing that is obvious about societies that have achieved certain degrees of industrialization is that innovation has been the critical variable in accounting forthedynamicsoftheeconomiesandtheresultinglevelsofeconomicprosper- ity. Industrial economies have acquired unusual skills in generating, diffusing, and elaborating innovation, and understanding innovation is basic to compre- hending economic growth and development. According to Rosenberg (1994), to further investigate the role of innovation in economic growth, two relevant questions must be answered: “what can be said about the manner in which the stock of technological knowledge grows over time? And, to what factors is it responsive,andinwhatways?”However,satisfactoryanswerstothesequestions have not been provided, at least through formal analysis. What is less obvious than the critical role of innovation is the underlying mechanismofinnovation,orinsidetheblackbox(Rosenberg,1982),anditseco- nomic implications, which can be referred to as outside the black box. This implies that an integrative approach has to be taken to explore both inside and outside the black box. On the one hand, the existing literature on innovation hasstudiedinnovationprocessesatthefirmlevel,withlessattentionpaidtoeco- nomicconsequencesandimplicationsattheeconomylevel.Ontheotherhand,a relatively recent development in the field of endogenous economic growth are studies that have incorporated endogenous innovation in a general equilibrium frameworkanddrawnvariouseconomicpolicyimplications.However,theinno- vationmechanismutilizedpresupposesasimpleinnovationfunction,inwhicha positive relationship is assumed between R&D investment as an input and the arrival of innovation in a deterministic or stochastic manner. As a result, in the endogenous growth literature, an innovation mechanism is assumed, rather than explored. Instead, the literature has focused on drawing out the economic implications of this simple innovation function. Thepurposeofthisbookistoprovideseveralmodelsregardingtheeconomics of the innovation system, which can be applied to analyses of both inside and outside the black box. Of course, it is difficult to simultaneously integrate a detailed description of the innovation process as in the innovation management